...Money: Demand and Supply The Meaning of Money Money is the set of assets in an economy that people regularly use to buy goods and services from other people. Money Supply The money supply is a policy variable that is controlled by the Fed. * Through instruments such as open-market operations, the Fed directly controls the quantity of money supplied. Money Demand Money demand has several determinants, including interest rates and the average level of prices in the economy. People hold money because it is the medium of exchange. * The amount of money people choose to hold depends on the prices of goods and services. In the long run, the overall level of prices adjusts to the level at which the demand for money equals the supply. Figure 1 Money Supply, Money Demand, and the Equilibrium Price Level Figure 2 The Effects of Monetary Injection Chapter 31 Open-Economy Macroeconomics: Basic Concepts Open and Closed Economies * A closed economy is one that does not interact with other economies in the world. * There are no exports, no imports, and no capital flows. * An open economy is one that interacts freely with other economies around the world. An Open Economy * An open economy interacts with other countries in two ways. * It buys and sells goods and services in world product markets. * It buys and sells capital assets in world financial markets. THE INTERNATIONAL FLOW OF...
Words: 1636 - Pages: 7
...Purchasing Power Parity I. Introduction In every transaction we have two parties, one who is receiving a product or service, and one who is expecting a predetermined amount of money for the product. The purchaser expects to pay the same dollar amount whether they are at home using their currency or abroad exchanging their home currency for the foreign currency. In a perfect world this would prove the Purchase Power Parity that we will discuss in this paper. There is great history of the evolution of the currency, and how the price of that currency has affected price. These changes will be explored to see if there are any correlations that we can show. In this paper we will attempt to test the correlation between the increase and decrease in price against the increase and decrease of the value of the currency for a specific country. II. Purchase Power Parity Purchase Power Parity can be defined as the law of one price where the identical product would sell for the same price no matter the location. The PPP is applying that law of one price to currency. Purchase Power Parity is an economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power. In other words, the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency. Gustav Cassel developed this theory, in its current form...
Words: 910 - Pages: 4
...Trade surplus is an excess of exports over imports. P. 660. vi. Trade deficit is an excess of imports over exports. P. 661. vii. Balanced trade is a situation in which exports equal imports. P. 661. b. Case Study: The Increasing Openness of the U.S. Economy, P. 661. i. Over the last 50 years, both exports and imports as a share of GDP have more than doubled due to improvements in (1) transportation, (2) telecommunications, (3) technological progress and (4) the movement toward freer trade. ii. Figure 1: The Internationalization of the U.S. Economy. P. 661. iii. In the News: The Changing Nature of US Exports, P. 662. c. The Flow of Financial Resources: Net Capital Outflow i. Net Capital Outflow (NCO) is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. P. 664. ii. The flow of capital abroad takes two...
Words: 1347 - Pages: 6
...system Creates Conditions for Bilateral Trade Agreements Foreign Exchange Rate Structure of Foreign Exchange Market Functions of Foreign Exchange Market (i) Transferring foreign currency from one country to another where it is needed in the settlement of payments; (ii) Providing short-term credit to the importers, and, thereby, facilitating smooth flow of goods and services between the countries; and (iii) Stabilizing the foreign exchange rate by spot and forward market; sale and purchase of foreign currencies. Kind of Foreign Exchange Market Spot Market: The spot market refers to that segment of the foreign exchange market in which Sale and purchase of foreign currency are settled within two days of the deal. The spot sale and Purchase of foreign exchange make the spot market. The rate at which foreign currency is bought and sold in the spot market is called spot exchange rate Forward Market: The forward exchange market refers to the deals for sale and purchase of a foreign currency at some future date at a presettled exchange rate. When buyers and sellers enter an agreement to buy and sell a foreign currency after 90 days of the deal, it is called forward transaction Nature of Foreign Exchange Transactions • . The nature and purpose of foreign exchange transactions are such that the exchange rate fluctuates day by day, some times even hour by hour. Therefore, the foreign exchange transactions involve risk and hence an opportunity to make profits...
Words: 1725 - Pages: 7
...ASSIGNMENT TWO | Research on the currency of Bangladesh | | GROUP MEMBERS:IFTESHAM ARA JAHAN 082604030FARIHA NOWSHIN HAQUE 1020276030MINHAZUR RAHMAN 081314030MUSA HABIB KISHAN 0930442030NUSRAT MINALLAH SHOSHI 0910283030SIDRATUL MUNTAHA KHAN 0920517530 | Table of Contents Analysis of Bangladeshi Taka (BDT) against US Dollar($) 3 Factors that influences BDT 5 Analysis of Macroeconomic variables 7 Income level 7 Fig: Income receipts of Bangladesh from 2005-2012in US dollar 8 Income payments (US dollar) in Bangladesh 8 Effects of inflation on income 9 Effects of interest rates on income level: 11 Theory of Interest Rate Parity and BDT 12 Theory of Purchasing Power Parity 14 Theory of International Fisher Effect against BDT 16 Regulations on foreign currency transfers/remittances 16 Analysis of investment opportunity for US-based MNC 17 Analysis of Bangladeshi Taka (BDT) against US Dollar ($) Exchange rates play a vital role in a country's level of trade. This is critical to almost every free market-oriented economy in the world. Numerous factors such as inflation, interest rates, current-account/trade balance, public (government) debt and political environment determine exchange rates and all are related to the trading relationship between any two countries. The exchange rate, measured as a number of units of local currency per unit of foreign currency, is the price of the...
Words: 4139 - Pages: 17
...Purchasing power parity dates back several centuries but was actually introduced after World War 1. Before the war, gold standards were used but after the war it was difficult to continue this way because speculators were afraid countries would ask for high revenues after devaluing their currencies. Therefore, Cassel developed Purchasing Power Parity during the international policy debate when they were discussing about the nominal exchange rates and what the appropriate level would be. Gustav Cassel has created the modern definition of purchasing power parity; ‘When measured in the same unit, the monies of different countries should have the same purchasing power and command the same basket of goods.’ In simpler terms it means, that in its absolute version, when expressed in a common currency the price levels should be equal worldwide. The theory is developed from the law of one price. The law of one price is the main building block of purchasing power parity. ‘The law states that once converted to a common currency, the same good should sell for the same price in different countries’ (Mkenda 2001 pg 6). That is for any good: P* = SP** Where; P* is the domestic price of the good P** is the foreign price for the good S is the domestic nominal exchange rate. (Mkenda 2001 pg 6-7). Under the law of one price it assumes that the there is perfect competition, hence no transportation costs, trade barriers or tariffs. Purely free trade, which makes the price of goods in...
Words: 1461 - Pages: 6
...zones that have high investment returns as compared to home countries (Fu, 2000). The trend of globalization has made most firms become multinational corporations. The most common method for MNCs is through franchises (Jones, 2005). In line with this, economists have put up theories explaining why businesses expand beyond their national boundaries (Hicks, 2000). My primary objective in this paper, therefore, is to discuss international finance and other macroeconomics policies. To foresee this goal, I will delve into foreign exchange market and operations of multinational corporations (MNCs). Theories Explaining Why Corporations Expand to become Multinationals a). Financial economists have brought forward three key arguments that enumerate why companies expand their operations to global markets. These theories are; the imperfect markets theory, the comparative advantage theory and the product cycle theory (Levi, 2004). i).The Comparative Advantage Theory This theory is among the most important concepts in international trade. It states that economic welfare increases when countries specialize in producing lower opportunity cost goods. It is far from looking the monetary value of producing goods as in the theory of absolute advantage (Bishop, 2004). A comparative advantage arises when a corporation realizes larger sales margins as compared to its competitors just because this company can sell at lower prices in comparison to its competitors. Multinationals have consistently...
Words: 5206 - Pages: 21
...can be used as a predictive criterion for short-term trends (technical analysis); * expectations. activities of financial operators are not the only based on known economic data, but also on their expectations of future trends; * political events / psychological factors, such as elections, political tensions, etc. Fundamental analysis is based on the study of the economy. It is based on the assumption that the supply and demand of currencies is the result of economic processes that can be observed in practice and can be predictable. Fundamental analysis studies the relationship between the evolution of exchange rates and economic indicators, a relationship that exists and is used to make predictions. Up to this point, none of the theories views ahead serves all the exchange rate forecast requirements. This is why there are many factors of parallel evaluation, valid for part of the study area, but can also be mutually exclusive. Analysis of the balance of payments This...
Words: 764 - Pages: 4
...Gradable Assignment 1 1. Full form of GDP and what is the difference between GDP per Capita Ans: GDP–Gross Domestic Product GDP per Capita – An estimate of an individual spends as a consumer compared to the total population spending on products and services. GDP is gross domestic product, the total economic output of a country, i.e., the amount of money a country makes. GDP per capita is the total output divided by the number of people in the population, so you can get a figure of the average output of each person, i.e., the average amount of money each person makes. 2. Define or explain Purchase Power Parity in two lines Ans: Purchasing power parity (PPP) is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. 3. Which of these are Formal Institutions and Informal Institutions Ans: a. Laws- b. Ethics- c. Culture- d. Regulations- e. Norms- f. Rules- 4. Name two countries under Theocratic Laws Ans: Vatican City 5. Name at least two of the three kinds of economies Ans: An economy is a system whereby goods are produced and exchanged. Without a viable economy, a state will collapse. There are three maintypes of economies: free market, command, and mixed. 6. Name two characteristics each of Low Context and High Context cultures Ans: High Context Cultures 1. Space is communal; people stand close...
Words: 698 - Pages: 3
...Manoa Brown Friday, May 3, 13 Principles of Macroeconomics Exchange Rates People, firms and nation exchange products for money and use the money to buy other products to pay for the use of resources. Within an economy, prices are stated in the domestic currency, such as US dollars to European euros. Buyers use their currency to purchase goods. International markets are different. Producers in other countries who export goods want to be paid in their own currencies so they can carry out transactions. As a result, a foreign exchange market develops where national currencies can be exchanged. Such markets serve the need of all international buyers and sellers. The equilibrium prices in these markets are called exchange rates. An exchange rate is the rate at which the currency of one nation is exchanged for the currency of another. The foreign exchange market is the financial relationship between countries that makes it possible for international trade to be accomplished more efficiently than barter. Because each nation uses its own monetary unit, people in one country who want to purchase something in another country must exchange their own currency for the other to accommodate the transaction. Many travelers will research foreign exchange rates before purchasing cheap airline tickets or other means of travel to other countries. Depending on the destination, some travelers can benefit greatly from exchanging currencies .The foreign exchange market is where one nation's currency...
Words: 1094 - Pages: 5
...1. one way a company can achieve market power is through C. vertical integration 2. Which of the following include freedom of speech, freedom to organize political parties, and the right to a fair trial? a. Minority rights b. Political rights c. Property rights d. Civil rights D 3. The United Nations' human development index a. is another name for purchasing power parity b. measures the extent to which a government equitably satisfies the needs of its people. c. measures the extent to which a people's needs are satisfied according to their ability to buy a home, finance an education, and find steady employment d. incorporates life expectancy, educational attainment, and family size c 4. The government of which of the following countries is currently a mix of communism and right-wing totalitarianism? China 5. Political systems can be characterized by ________. a. why people participate in them b. the number of corruption charges brought forward by the judicial system c. the geography and the environmental sciences of the country d. who participates in them and to what extent they participate d 6. According to Hofstede, which of the following describes the degree of inequality between people in different occupations? a. Power distance b. Uncertainty avoidance c. Individualism d. Collectivism A 7. The wearing of turbans by Muslims in Asia is an example of which of the following? a. Folk custom b. Popular custom c. Symbolic act ...
Words: 685 - Pages: 3
...------------------------------------------------- Chapter 9 International Trade & Exchange rate ------------------------------------------------- What You will Learn in this Chapter * Study the theory of Comparative Advantage * Differentiate between Terms of Trade and Balance of payments * Explain Exchange Rate Determination * Describe the Concepts closely related to exchange rate of exchange A. The theory of comparative Advantage: In his book ‘Principles of Political Economy’, David Ricardo (1817) explained his theory of Comparative Advantage (comparative costs). This theory, subsequently modified by John Stuart Mill, is the foundation of the theory of international trade. The trade between two countries takes place because the same commodity is produced at different costs in different countries. The differences in the cost of production arise because of differences in factor endowments in different countries and the degree of specialization. Thus trade relies on cost differences. The Doctrine of Comparative costs states that a country will benefit by specializing in the production of those commodities in which its comparative cost advantage is greater, exporting these commodities in exchange for commodities in which the comparative cost advantage is less. Panel (a) illustrates the fact that over the past 40 years, the United States has exported a steadily growing share of its GDP to other countries and imported a growing share...
Words: 2369 - Pages: 10
.... 1St Unit – Introduction to International finance ‘A’ section. G01 1) What is the objective of International Business? 2) What is MNC? 3) What are the components of Input market? 4) Name the various sources at the micro level of a company? 5) As for as India is concerned what is the Macro view of foreign flow? 6) What you mean by output market? G02 1) What you mean by sectoral Interdependence? 2) What is Foreign exchange risk and Political risk? 3) How licensing and franchising are different? 4) What motivates International Business? Section B G03. 1) Bring out the various factors of differences leading to interdependence. 2) At the micro level of a company what are the sources of Finances? 3) What are the significance of input market and output market? 4) What is the relevance of international finance to a corporate executive? G04 1. What are the distinguishing features of International finance? 2. What are the key decision areas in International Financial Management? 3. What is market imperfection in international finance? 4. What are the various risks involved in international finance? 5. What is the scope of international finance? Section C G05 1) “The emergence of International trade is attributed to sectoral...
Words: 1410 - Pages: 6
...Executive Summary ___________________________________________________________________________ The foreign exchange market does not have a physical market place called the foreign exchange market. It is a mechanism through which one country's currency can be exchange i.e. bought or sold for the currency of another country. The foreign exchange market does not have any geographic location. The market comprises of all foreign exchange traders who are connected to each other through out the world. They deal with each other through telephones, telexes and electronic systems. The foreign exchange market operates twenty four hours a day during the business week; the only time it is silent is after the New York market closes on Friday afternoon and before the Sydney market opens on Monday morning (which would be Sunday evening New York time). In the aftermath of the Asian crisis, which curbed and restricted offshore trading in regional currencies, most derivatives markets in Asia are still in their infancy. Financial institutions trying to introduce or transplant products from mature markets to those that are lesser developed are meeting with limited success. The RBI has ushered rupee derivatives trading into the country: it has formally allowed banks and corporate to hedge against interest rate risks through the use of interest rate swaps (IRS) and forward rate agreement (FRA). According to the guidelines issued by RBI there will be no restriction on the tenure and size of the...
Words: 11166 - Pages: 45
...should then equal the difference in the inflation rate between the two countries. Exchange Rates: Nominal exchange rate simple states how much of one currency can be traded for a unit of another currency. The real exchange rate, describes how many of a good or service in one country can be traded for one of that good or service in another country. * For example, a real exchange rate might state how many European bottles of wine can be exchanged for one US bottle of wine. Real exchange rates can be thought of as answering the following question: If you took an item produced domestically, sold it at the domestic market price, exchanged the money you got for the item for foreign currency, and then used that foreign currency to purchase units of the equivalent item produced in the foreign country, how many units of the foreign good would you be able to buy? The units on real exchange rates, therefore, are units of foreign good over units of domestic (home country) good, since real exchange rates show how many foreign goods you can get per unit of domestic...
Words: 1032 - Pages: 5
